There are many ways to measure financial conditions — and they don’t all agree— but it’s hard to look at the surge in real rates, investment-grade corporate yields and mortgages and not believe that conditions have grown significantly more restrictive in recent months. On a real basis, government yields have surged 70 basis points since the Fed’s last rate increase in July and are near the highest since January 2009. The average for a 30-year fixed-rate mortgage has climbed to 7.31% from 6.78% in July and is now the highest since 2000. And the all-in yield on an investment-grade corporate bond is back within a whisker of its 13-year high.
The Federal Reserve’s hawks have been back on the speaking circuit,and markets are abuzz that rates may have to move higher than previously expected. Someone apparently just took out a big short position premised on the chances that rates markets underestimate the odds of an increase in November. And, of course, JPMorgan Chase & Co Chief Executive Officer Jamie Dimon has warned clients to prepare for a worst-case scenario of a move in the direction of 7%.
What these headlines miss is the fact that a lot of tightening has already happened since policymakers last raised rates in July.
